Sri Lanka’s credit risks may remain high for some time due to promises made by Anura Kumara Dissanayake, the country’s new president, to reduce taxes and alter the nation’s bailout from the International Monetary Fund.
After promising broad change in the wake of an economic collapse, firebrand Anura Kumara Dissanayake, who leans Marxist, won the weekend election in Sri Lanka by a landslide margin.
Concerns regarding a precarious IMF-backed debt restructuring that the previous government agreed to just days before the election have been stoked by Anura Kumara Dissanayake’s campaign promises to reduce certain taxes and make Sri Lanka’s IMF bailout programme more “palatable.”
“We do not expect significant disruption to the country’s reform agenda or macroeconomic policies, which include the ongoing debt restructuring and structural adjustments under its programme with the International Monetary Fund,” Moody’s said.
“However, some policies are likely to be reprioritized amid challenges in maintaining fiscal consolidation that could keep credit risks elevated for some time,” it added.
Sri Lanka has taken several actions to re-establish fiscal sustainability since its default in 2022, including increasing the corporate tax and value-added tax rates as well as reducing the amount of personal tax exemptions.
According to Moody’s, which rates Sri Lanka slightly above default, the steps helped reduce the country’s fiscal deficit to 8% of GDP from 11% in 2021 and increase government revenues to slightly over 11% in 2023 from 8% in 2021.
This is still a massive deficit, and it is anticipated that debt affordability will stay “weak” as well, with interest payments alone likely to consume 40–50% of revenue over the next two to three years.
Although it is an improvement over 70% in 2021, that is “still among the weakest across sovereigns we rate,” according to Moody’s.